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Brooks Macdonald – Daily Investment Bulletin

Please see below the latest daily investment bulletin from Brooks Macdonald, which was published and received this morning (05/08/2022):

What has happened

Equity and bond markets were generally quieter at a headline level yesterday, however with oil prices continuing to fall, WTI oil below $90 per barrel and Brent below $95 per barrel, the energy sector saw stark underperformance.

Bank of England

The Bank of England presented a gloomy picture for the UK economy as it announced a 50bp rate rise, the largest since 1995. Whilst forward guidance for central banks is, at best, on hold for this cycle, further rate hikes seem likely given the Bank’s focus on inflation and its lofty predictions of where year-on-year inflation rates could end up. The BoE predicted a prolonged contraction in economic activity, starting in Q4 of this year then lasting until the start of 2024. Alongside this, the Bank forecast that inflation would reach 13% this year before falling in coming quarters. These numbers are quite spectacular changes from previous guidance and paint a very downbeat outlook for the UK economy. One of the big question marks at the moment is how UK government fiscal policy will play out, and for that we will need to know the next Conservative Party leader. 

US Employment Report

The initial jobless claims in the US have been a recent area of weakness for the US labour market outlook, showing a worsening picture even as the non-farm payroll reports showed a more upbeat picture. Yesterday’s claims came in line with expectations however the number of ongoing claims rose more than expected, suggesting that those claiming are struggling to find roles as quickly. Given the importance of the employment outlook to the US Fed, today’s employment report will be critical to whether the US central bank begins to more formally pivot to concerns around economic growth and inflation rather than inflation alone. The market expects 250,000 new jobs to have been created in July and for unemployment rate to stay steady at 3.6%.

What does Brooks Macdonald think

Recent Fed speakers have used the strong labour market backdrop as the crux of their argument as to why Fed interest rates still need to rise to tackle inflation. A weaker employment report will question this narrative and lead the Fed to consider a more balanced view of future interest rates. Recent corporate earnings have painted a more positive picture of the economy in the near term however the initial jobless claims suggest that there are now signs the US economy is losing some of its momentum.

Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.

Carl Mitchell – Dip PFS

Independent Financial Adviser


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Brewin Dolphin: Markets in a Minute

Please see the below article from Brewin Dolphin, summarising the performance of financial markets over the last week, as the Russian invasion of Ukraine and soaring oil prices continue to disrupt the economy – received yesterday afternoon – 08/03/2022

Stocks slide as Ukraine conflict escalates

Stock markets experienced another week of heavy losses last week as the conflict in Ukraine escalated.

The pan-European STOXX 600 and the FTSE 100 both lost around seven percentage points, while Germany’s Dax and France’s CAC 40 plunged by more than 10%. Losses were particularly heavy on Friday as ceasefire talks failed and Russia seized control of a nuclear power plant.

US indices also ended lower. The S&P 500 declined 1.3%, dragged down by the technology, financials, consumer discretionary and communication services sectors. Energy stocks performed well as oil prices surged.

Over in Asia, Japan’s Nikkei 225 slipped 1.9%, with concerns about tightening monetary policy in the US also weighing on investor sentiment.

Oil prices soar to near all-time high

Oil prices soared at the start of trading on Monday (7 March) as the US and Europe mulled a ban on imports of Russian oil. In the first few minutes of trading, the price of Brent crude oil surged to $139 a barrel, the highest since July 2008.

On Sunday, US secretary of state Antony Blinken said the Biden administration and its allies were discussing a ban on Russian oil supplies. Later, US House of Representatives speaker Nancy Pelosi said the chamber was exploring legislation “that will further isolate Russia from the global economy.”

The surge in oil prices was accompanied by another day of losses for global stock markets. In the US, the S&P 500 closed the day down 3.0%, the Nasdaq lost 3.6% and the Dow slipped 2.4% amid fears the conflict could hinder US economic growth and add further inflationary pressure. The pan-European STOXX 600 declined 1.1% and the FTSE 100 slipped 0.4%, with news of a ceasefire offer from Moscow helping to limit losses.

European stocks started Tuesday’s trading session in the green, with the Dax, CAC 40 and STOXX 600 up 1.7%, 2.6% and 1.5%, respectively.

Eurozone inflation hits record 5.8%

In economic news, figures released last week showed inflation in the eurozone surged by a record 5.8% year on-year in February, up from 5.1% in January and above the 5.4% forecast by economists. Energy prices soared by 31.7%, while unprocessed food prices increased by 6.1%, according to Eurostat.

The European Central Bank (ECB) faces the difficult dilemma of whether to raise interest rates in an attempt to combat soaring inflation. Several ECB governing council members have said policy decisions should be delayed because of the uncertainty caused by the Ukraine war. Meanwhile, the heads of the Portuguese and Greek central banks warned the crisis risks plunging the eurozone into a period of stagflation — a mix of stagnating growth and inflationary supply pressures.

According to the Financial Times, Fabio Panetta, an ECB executive board member, said: “We should aim to accompany the recovery with a light touch, taking moderate and careful steps as the fallout from the current crisis becomes clearer.”

UK services activity hits eight-month high

Here in the UK, growth in the services sector accelerated sharply in February as the Omicron wave of Covid-19 subsided. The headline seasonally adjusted IHS Markit/ CIPS UK Services PMI Business Activity Index rose to 60.5 from 54.1 in January, the fastest rise in output since June last year. Respondents said market demand and client confidence improved alongside the reduction in pandemic-related disruption, thereby supporting growth of activity.

However, input costs increased substantially in February, with the rate of inflation the second-fastest in more than a quarter of a century of data collection. The rate of output price inflation hit a fresh record high for the second month running, with around one-third of respondents raising their selling prices during the month.

Andrew Harker, economics director at IHS Markit, said: “Although the latest set of PMI data were encouraging, the inflationary picture still has the potential to limit growth, while it remains to be seen what impact the Russian invasion of Ukraine will have on the service sector and wider economy. As such, there are still downside risks even as disruption from the pandemic finally appears to be fading.”

US jobs growth accelerates

In the US, meanwhile, figures from the Labor Department showed non-farm payrolls rose by 687,000 in February, far greater than the 400,000 increase expected by economists. This was led by hiring in leisure and hospitality, education, and health services. The unemployment rate fell from 4.0% to 3.8%, whereas the annual rate of growth in average hourly earnings slowed from 5.7% to 5.1%.

Federal Reserve chair Jerome Powell described the labour market as extremely tight, and said he would support a 0.25% increase in interest rates at the central bank’s March policy meeting and would be “prepared to move more aggressively” later on if inflation does not start to ease.

Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.

Alex Kitteringham

9th March 2022

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The Big Market Pay Debate

Please see the below article from AJ Bell, examining the potential effects on wage growth from current inflationary pressure and the implications for stock market valuations  – received yesterday – 27/02/2022

Calls from both the Bank of England’s governor, Andrew Bailey, and its chief economist, Huw Pill, for wage restraint do not sit easily alongside the current headline inflation figures. Nor does Unilever’s statement (10 Feb) that it raised prices by 4.9% in the fourth quarter of last year and has planned further hikes in 2022, thanks to expected input cost inflation of 3% to 4%.

A few small caps, notably own-brand cleaning products specialist McBride, loo roll maker Accrol and retailer Joules, had dished out profit warnings as they have proved unable to raise prices far or fast enough to compensate for rising costs.

But Unilever is the biggest so far, as it forecast a drop in profit margins of some 1.4 to 2.4 percentage points in 2022, down to 16% to 17%. Even though not all of this is down to higher raw material, freight and packaging costs, as the food-to-personal care giant continues to invest heavily in product development and marketing, it does beg the question of who is able to defend product margins in an inflationary environment if Unilever cannot? After all, it can call upon the power of brands such as Marmite, Hellmans, Dove and Magnum.

Investors must again therefore address three key questions:

Will workers demand – and get – meaty wage rises in response to their rising bills and expenses? Lowly unemployment numbers would suggest this is their time to strike (either figuratively or literally speaking).

If they are successful will that drive wider inflation and force central banks to raise interest rates further and faster than currently anticipated by markets?

Will rising wages, alongside freight, raw materials, packaging, start to take a bite out of corporate profit margins? And, if so, what does that mean for stock market valuations, especially at a time when interest rates are rising?

Vicious circle

Wage growth is cooling a little on both sides of the Atlantic, but the readings are still high by the standards of the (admittedly relative short) datasets that we have. In the UK, total pay rose by 4.8% year-on-year in the three months to December and US workers’ average hourly pay rose 5.7% year-on-year in January.

Low unemployment rates and high numbers of job vacancies relative to the numbers of those without work would suggest labour may just have the whip hand in any pay negotiations. Trades unionists and workers may be happy about that for political, philosophical and economic reasons as there can be little doubt that capital has had its wicked way with labour for much of the past four decades, and beyond.

Since 1947, Americans’ pay has fallen by more than four percentage points as a portion of GDP. American corporate profits have increased by around six percentage points over the same time frame.

A similar trend can be seen in the UK, where the data goes back to 1955. Since then, labour’s take-home slice of the economy has dropped by almost ten percentage points, while corporations have increased theirs by the thick end of six points.

Margin call

Investors could therefore be forgiven for wondering what may happen next. After all, corporate profits stand at, or close to, a record high as a percentage of GDP in both the US and UK.

Any margin pressure could therefore restrict profit growth (and that is before UK-based firms face a jump in corporation tax to 25% from 19% from April 2023). And the combination of higher interest rates and slower profit growth is not an ideal one, especially in the US stock market, where valuations are at or near all-time peaks, based on market-cap-to-GDP and the Shiller cyclically adjusted price earnings CAPE ratio.

Yet all may not be lost for three reasons. Higher pay could help consumers’ keep spending. Companies report sales and profits in nominal, not real, inflation-adjusted terms. Sales up, costs up can still mean profits up, which is why stocks and shares are seen as offering a better hedge against inflation than say bonds.

Granted, some companies and industries may be better suited to coping with inflation than others. Areas where demand is relatively price inelastic, or insensitive, are one – they include oil and tobacco. Industries where demand growth outstrips supply growth (and it takes time to create fresh supply) are another – and that could include mining, especially as central banks cannot print copper, gold or cobalt.

And consumer staples or luxury goods companies with brands can be better placed than most to raise prices thanks to the customer loyalty and pricing power they confer. Luckily, the FTSE 100 has quite a few of those.

Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.

Alex Kitteringham


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Brewin Dolphin: Markets in a Minute

Please see below, Brewin Dolphin’s latest ‘Markets in a Minute’ update, examining last week’s global market performance – Received late yesterday afternoon – 08/02/2022

Stocks mixed as US earnings season ramps up

Equities were mixed last week as investors weighed mostly positive US earnings reports against the threat of rising interest rates.

The pan-European STOXX 600 fell 0.7% after European Central Bank (ECB) president Christine Lagarde declined to rule out an increase in interest rates this year. Germany’s Dax fell 1.4% and France’s CAC 40 slipped 0.2%. The UK’s FTSE 100 edged up 0.7%, despite the Bank of England’s (BoE) decision to hike the base interest rate for a second month in a row.

Over in the US, the S&P 500 finished a volatile week up 1.6% as investors digested fourth quarter earnings reports from big technology companies including Alphabet (Google’s parent), Amazon, and Meta (formerly Facebook). A surprise jump in US payrolls pushed the yield on the ten-year US Treasury note to its highest level since 2019.

China’s financial markets were closed last week for the Lunar New Year.

Tech selloff drives US stocks lower

US equities started this week in the red, with the S&P 500 and the Nasdaq down 0.4% and 0.6%, respectively, on Monday (7 February) following a selloff in big tech names. Investors are set to receive another batch of fourth quarter earnings in the coming days, including Disney, Pfizer and Coca-Cola. Meanwhile, the consumer price index, due on Thursday, is expected to add further weight to the case for hiking interest rates.

Germany’s Dax managed a 0.7% gain on Monday, despite data showing the country’s industrial output fell by 0.3% month-on-month in December, driven by supply chain bottlenecks and a decline in construction. In the UK, house prices rose 0.3% in January from the previous month, the slowest pace since June. Halifax said house price growth is expected to slow considerably over the next 12 months as households grapple with the cost-of-living crisis.

At the start of trading on Tuesday, the FTSE 100 was up around 0.6% as the latest BRC-KPMG survey showed total retail sales increased by 11.9% in January from a year ago.

BoE increases interest rate to 0.5%

Last week, the BoE’s monetary policy committee voted to increase the base interest rate by 25 basis points to 0.5%. This marked the first back-to-back rate hike since 2004. It came after data revealed UK inflation surged to a 30-year high in December amid rising energy costs and ongoing supply chain issues. The BoE also raised its inflation forecast to an April peak of 7.25%, which would be the highest since 1991.

The Bank warned that UK households would see their inflation-adjusted post-tax disposable income fall by 2% this year because of higher energy bills, taxes, and comparatively weak earnings. This would be the biggest fall ever recorded. Noting that higher costs would depress consumer spending and economic growth, the Bank cut its gross domestic product (GDP) growth forecast for 2022 from 5.0% to 3.75%.

The BoE’s report came shortly after Ofgem said households on default variable gas and electricity tariffs and those with prepayment meters would see their bills rise by around £700 in April, a 54% increase. In response, chancellor Rishi Sunak announced households would get £200 off energy bills in October, to be repaid over five years. Those in council tax bands A to D will also receive a £150 rebate.

ECB ‘much closer’ to inflation target

The odds of the ECB hiking interest rates this year have increased after Lagarde said the bank was “getting much closer” to hitting its target on inflation. Lagarde did not explicitly rule out increasing interest rates, but instead said there was consensus among ECB policymakers about the decision to keep rates unchanged.

“Compared with our expectations in December, risks to the inflation outlook are tilted to the upside, particularly in the near term,” Lagarde said.

She added: “We are all concerned to take the right steps at the right time, and I think there was also a concern and a determination around the table not to rush into a decision unless we had a proper and thorough assessment based on data and the analytical work that will take place in the next few weeks.”

Lagarde’s comments have been described as hawkish, and interpreted as signalling a shift to tightening monetary policy from March.

US payrolls beat estimates

US nonfarm payrolls jumped by 467,000 in January despite surging Omicron infections. This was well ahead of the 150,000 increase predicted in a Dow Jones poll, and came a week after the government warned the numbers could be low because of the pandemic.

The Labor Department report also contained sizeable revisions to data from the previous two months. December’s increase was lifted from 199,000 to 510,000, and November’s from 249,000 to 647,000. These changes brought the total for 2021 to just under 6.67 million, the biggest single-year gain in US history.

Earnings also rose sharply by 0.7% from the previous month and by 5.7% on an annual basis, providing further confirmation that inflation is accelerating. The unemployment rate edged higher to 4.0% from 3.9% in December. However, a broader measure of unemployment, which includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment, dropped from 7.3% to 7.1%, the lowest since February 2020.

Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.

Alex Kitteringham


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Brewin Dolphin – Markets in a Minute

Please see below, the Markets in a Minute update received from Brewin Dolphin late yesterday afternoon – 25/01/2022

Stocks slump as interest rate fears grow

Concerns about interest rate hikes in the US, UK and Europe sent stock markets tumbling last week.

In the US, the S&P 500 recorded its biggest fall in more than 14 months, ending the holiday-shortened trading week down 5.7%. The Nasdaq suffered its steepest weekly drop since the start of the pandemic, tumbling 7.6% as technology stocks bore the brunt of rate hike fears.

European indices declined amid expectations the European Central Bank (ECB) and Bank of England (BoE) would tighten monetary policy. The STOXX 600 fell 1.4%, the Dax lost 1.8% and the FTSE 100 slipped 0.7%.

Over in Asia, the Nikkei 225 fell 2.1% as surging coronavirus infections resulted in Tokyo and 12 other prefectures being placed under Covid-19 quasi[1]emergency measures.

Last week’s market performance*

• FTSE 100: -0.65%

• S&P 5001 : -5.68%

• Dow1 : -4.58%

• Nasdaq1 : -7.55%

• Dax: -1.76%

• Hang Seng: +2.39%

• Shanghai Composite: +0.04%

• Nikkei: -2.14%

*Data from close on Friday 14 January to close of business on Friday 21 January. 1 Closed Monday 17 January.

European shares hit by Russia-Ukraine tensions

UK and European shares remained in the red on Monday (24 January) as tensions grew between Russia and Ukraine. The STOXX 600 plunged 3.8% and the FTSE 100 slid 2.6%. Disappointing economic data also weighed on investor sentiment. The flash IHS Markit / CIPS UK composite output index fell to an 11-month low of 53.4 in January, as services activity was hit by the spread of Omicron.

The S&P 500 and the Dow both added 0.3% on Monday to recover some of last week’s sharp selloff. Investors are now looking ahead to the Federal Reserve’s two-day policy meeting on Wednesday, which will hopefully provide much[1]needed clarity on US interest rates.

The FTSE 100 and the STOXX 600 followed US indices higher, gaining 0.5% and 0.3%, respectively, at the start of trading on Tuesday.

Interest rate expectations rise

Last week’s economic headlines focused on mounting expectations that central banks will increase interest rates in the face of rising inflation. In the US, where inflation is running at its fastest annual pace in nearly 40 years, there is widespread speculation the Federal Reserve will hike rates in March, possibly by as much as 0.5%.

The likelihood of the BoE increasing the base interest rate in February also rose after the Office for National Statistics published the latest UK inflation numbers. The consumer prices index (CPI) surged by 5.4% in the 12 months to December – the highest in nearly three decades. On a monthly basis, the CPI rose by 0.5%, driven by price increases in transport, food and non-alcoholic beverages, furniture and household goods, and housing and household services.

Andrew Bailey, governor of the BoE, told MPs that inflationary pressures could prove more persistent than expected. He said energy prices are not expected to start easing until the second half of 2023 – a year later than previously forecast – partly because of tensions between Russia and Ukraine. He also warned there could be a ‘wage-price spiral’, where wages and prices keep chasing each other higher.

UK consumer confidence drops

The latest UK consumer confidence index from GfK shows the impact surging inflation is having on people’s views of their personal finances and of the general economic Markets in a Minute 25 January 2022 situation. The overall index fell four points to -19 in January, the lowest reading since February 2021 and below analysts’ expectations of no change from December.

GfK UK Consumer Confidence Index

All five measures were down when compared with the previous month. People’s opinions of the economy were especially poor, with an eight-point decrease in how they viewed the past year and the year to come.

“Despite some good news about the easing of Covid restrictions, consumers are clearly bracing themselves for surging inflation, rising fuel bills and the prospect of interest rate rises,” said Joe Staton, client strategy director at GfK. “The four-point fall in the major purchase index certainly suggests people are ready to tighten their belts.”

US weekly jobless claims jump

Also weighing on the markets last week was an unexpected jump in US weekly jobless claims. These rose by 55,000 to 286,000 for the week ending 15 January, the highest level since mid-October and the steepest increase since last July. The winter wave of Covid-19 infections is thought to be one of the drivers behind the increase.

There was also discouraging housing market data, with figures from the National Association of Realtors (NAR) showing a 4.6% decline in existing home sales in December from the previous month. On an annual basis, sales were down by 7.1%. Lawrence Yun, chief economist at NAR, said the pullback was more a sign of supply constraints than weakened demand for housing. However, he added that existing home sales would slow slightly in the coming months due to higher mortgage rates.

China steps up monetary stimulus

In contrast to the US and the UK, China last week stepped up its monetary stimulus by lowering mortgage lending benchmark rates. This came after data showed further weakening in the property sector, a downturn which is expected to persist into 2022. According to Reuters, Liu Guoqiang, vice governor of the People’s Bank of China, said the bank should “introduce more policies that are conducive to stability, and should not introduce policies that are not conducive to stability”. Liu added that the bank would widen the use of its policy tools to prevent a collapse in credit.

Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.

Alex Kitteringham


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Why oils, metals and banks hold the key to the FTSE 100 in 2022

Please see below, an article from AJ Bell examining the key determinants of the FTSE 100 performance in 2022 – received late yesterday afternoon – 16/01/2022

The FTSE 100 is up by around 10% over the past 12 months, and it is now trading within a couple of percentage points of the all-time closing high of 7,878 reached back in May 2018. Vaccinations, an end to lockdowns (in England, at least), ultra-loose monetary policy from the Bank of England, fiscal support from the Government, and a global economic recovery are all possible reasons for the headline index’s steady advance from the pandemic-induced panic low of 4,994 in March 2020.

“The question now is if catalysts are required for the FTSE 100 and UK equities to make further gains, and the sort of advances which justify exposure within the realms of a balanced asset allocation.”

But advisers and clients must look forward when they plan portfolios, not backwards, so the question now is if catalysts are required for the FTSE 100 and UK equities to make further gains, and the sort of advances which justify exposure within the realms of a balanced asset allocation.

Dividend payments are one possibility. A prospective yield of 3.9% for 2022 from ordinary dividends, with the prospect of further special payments on top, may appeal to some, although with UK headline inflation running at 5.1%, according to the consumer price index, that part of the investment case for the FTSE 100 and UK equities looks less enticing than it once did.

Merger and acquisition activity is another. Over 70 UK quoted firms received bids in 2021 and two FTSE 100 firms were acquired: insurer RSA (in a deal that was announced in 2020) and grocer Morrisons. Overseas buyers snapped up both and a pound that has failed to regain its pre-Brexit poll levels from 2016 may have had a role to play here, as it made these assets look cheaper to euro- and dollar-denominated buyers.

Bid activity suggests there is value to be had, but value still needs something to happen to crystallise it. And perhaps that takes us on to earnings momentum.

Go with the flow

The good news is that earnings momentum remains positive for the FTSE 100 as analysts continue to increase their profit estimates.

“The good news is that earnings momentum remains positive for the FTSE 100 as analysts continue to increase their profit estimates. The less good news is that aggregate profits growth for the index is expected to slow to a virtual crawl following 2021’s rebound.”

Aggregate earnings forecasts for the FTSE 100 in 2022 and 2023 continue to rise

Source: Company accounts, Marketscreener, analysts’ consensus forecasts

The less good news is that aggregate profits growth for the index is expected to slow to a virtual crawl following 2021’s rebound. Not all of the numbers are in yet, but total pre-tax profits for the FTSE 100 are expected to have doubled in 2021. While it is unrealistic to expect such a torrid pace to continue, advisers and clients could be forgiven for looking askance at estimates which look for 6% profits growth in 2022 and just 1% in 2023.

Aggregate earnings growth for the FTSE 100 is expected to slow dramatically in 2022 and 2023

Source: Company accounts, Marketscreener, analysts’ consensus forecasts

A matter of mix

The reason for this sudden go-slow lies largely with the FTSE 100’s mix of constituents. Without wishing to be too pejorative about it, the index is largely made up of the unpredictable (oils and miners), the indigestible (banks and insurers) and the downright stodgy (utilities, telecoms and to a lesser degree pharmaceuticals). A racy mix it is not, at least in the low-growth, low-inflation, low-interest-rate environment that has dominated for the past decade or more.

The FTSE 100 is heavily slanted towards miners, financials and oils

Source: Refinitiv data, Marketscreener, analysts’ consensus forecasts

But even here may be where opportunity lies because there is just the chance that the environment is changing. Markets are no longer preoccupied with where inflation has gone and how low interest rates could go, but where inflation could peak and how high interest rates may have to go to rein it in.

“Markets are no longer preoccupied with where inflation has gone and how low interest rates could go, but where inflation could peak and how high interest rates may have to go to rein it in. In this environment, the FTSE 100 could come into its own.”

In this environment, the FTSE 100 could come into its own. It has underperformed in the world stage since the Brexit vote (if not before). Underperformance can mean unloved and unloved can mean undervalued, at least from a contrarian’s perspective. And undervalued is always a potentially interesting starting point, with the FTSE 100 looking decent value relative to its own history on around 13 times earnings for 2022.

Granted, its unusual, or at least distinctly twentieth-century, earnings mix (lacking in technology, abundant in commodities) may mean the FTSE 100 deserves a low rating relative to international peers such as the USA, which is packed with tech, biotech, social media and online winners, and an equally large range of potential future disruptors.

FTSE 100 may take its lead from commodities in 2022

Source: Refinitiv data

But if inflation runs hot and stays hot, then ‘real’ assets such as commodities, or paper claims on them via shares in mining and oil producing, may not be such a bad place to be. Nor may banks, which would welcome, at least to some degree, higher interest rates and a steeper yield curve, as they will help to fatten up net interest margins and thus profits (so long as higher borrowing costs do not weigh too heavily on customers’ ability to meet interest payments and return principal). The FTSE All-Share Banks index is up by 10% this year already and can point to an advance of more than 25% over the past 12 months, so the market is starting to look upon the banks more favourably than it has for a while.

Banking stocks are warming to steeper yield curves

Source: Refinitiv data

An index that gets 62% of its forecast profits and 51% of its forecast dividends from miners, financials and oils may therefore sound a bit unpredictable, indigestible or downright stodgy. But if inflation takes a hold, then the FTSE 100 might start to look more tempting.

Equally, if even modest interest rates slow the global recovery right down, or even tip it over into a recession, or a new viral variant does that job, then the UK’s heavyweight index could yet struggle to move past that May 2018 peak and continue to lag its global peers, many of whom already trade at or near new all-time highs, including America, France, Germany and India.

Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.

Alex Kitteringham


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Daily Investment Bulletin: Brooks Macdonald

Please see below, a daily investment update received this morning from Brooks Macdonald – 07/01/2022

What has happened

Ahead of the key employment report for the US economy, yesterday’s trading session was mostly focused on finding an equilibrium after the volatility on Wednesday created by the Fed minutes. European indices were lower, recalibrating for the US moves the previous days however there were signs of US stabilisation with the headline and technology index both close to flat for the day.

US jobs report

The key event of the day will be the release of the US jobs report for December. Given the hawkish noises from the Fed in recent months the health of the economy is of critical importance as it will determine whether the Fed utilises the rate and tightening optionality it has created within the bond market. Economist consensus points to 400,000 jobs being created in December with attention also being paid to the average hourly earnings for signs of further wage inflation. Omicron-related disruptions are the big unknown so there may be more COVID noise within this data set than, say, November’s numbers. Wage inflation remains a critical component of the future inflation narrative, we have seen household savings rates decline in recent months as prices rise and we return to the ‘new’ economic normal, equally energy costs have risen, weighing on the consumer’s discretionary spending power. Sustained wage increases would enable the consumer to shoulder these higher costs otherwise consumer demand may struggle in the face of 2021’s heady inflation numbers.

ISM data

The Institute for Supply Management issued their survey of economic activity in the services sector yesterday. The ISM index is calculated based on surveyed businesses saying that economic conditions are ‘better’, the ‘same’, or ‘worse’ than the previous month. These surveys are diffusion indices meaning that a reading of 50 means that the average economic conditions of those surveyed was the ‘same’ as the previous month. Figures above 50 imply more ‘better’ responses and therefore expansion, readings below 50 imply more ‘worse’ responses and therefore contraction. Yesterday’s reading was 62 for December which, whilst strong, missed economist expectations of 67.

What does Brooks Macdonald think

Yesterday’s ISM services miss underlines the difficulty in estimating data with the impact of Omicron, should the same occur today, the US jobs report could have plenty of room for surprise. Given the importance of the report to the current swings in market leadership, this could lead to further volatility.

Please continue to check back soon for a range of blog content from us and some of the world’s leading fund management houses.

Alex Kitteringham

7th January 2022

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Weekly Market Commentary | UK booster campaign accelerated following Pfizer efficacy report

Please see below, the weekly market commentary from Brooks Macdonald, providing an update on monetary policy and the ongoing risk of the Omicron variant – received yesterday afternoon – 13/12/2021.

  • Equities rallied strongly last week as Omicron fears eased
  • This week sees the Federal Reserve, European Central Bank and Bank of England announce their latest monetary policy
  • Existing vaccines are shown to provide good protection against Omicron, accelerating the importance of booster jabs

Equities rallied strongly last week as Omicron fears eased

Last week saw an uptick in optimism around the Omicron variant with equities benefitting from a broad rally early in the week that favoured cyclical and tech sectors. The rally lost steam by the end of the week, but this is more of a reflection of the sharp gains on Monday/Tuesday rather than a sudden bout of fear.

This week sees the Federal Reserve, European Central Bank and Bank of England announce their latest monetary policy

This week could be pivotal for central bank policy, with eight of the G20 central banks reporting on their latest policy. Those eight contain the Federal Reserve (Fed), European Central Bank (ECB) and Bank of England, with all of those banks expected to be considering a change to their monetary policy. Starting with the Fed, with the Consumer Price Index number last Friday in line with (elevated) expectations, an acceleration of the Fed’s tapering programme looks likely. Should the speed of asset purchase tapering double, for example, this would lead the current process to conclude in March and leave some room for the Fed to consider the timing of their first rate hike. This week’s Fed meeting will also provide the latest ‘dot plot’ of interest rate expectations so there is a lotto focus on. The ECB was expected to unveil a shift in policy towards rates guidance rather than liquidity guidance, in essence a slight pivot towards tightening policy. Given Omicron, this may be delayed until the New Year but it is a close call. In the UK, the Bank of England is expected to raise interest rates by 0.15% to 0.25% but again this is dependent on how the bank interprets the latest Omicron risk which has certainly grabbed headlines this weekend.

Existing vaccines are shown to provide good protection against Omicron, accelerating the importance of booster jabs

On Friday, the UK released a report looking at the efficacy of three Pfizer vaccine doses (two initial, plus a booster) which showed a c.75% effectiveness against symptomatic disease. The data underlined the importance to governments of the booster campaign and plans were announced to offer all adults in England a booster by 31 December. Omicron’s growth rate appears to be significantly higher than delta and this is causing governments to release some quite daunting predicted case numbers.

With each day that goes by, financial markets are building confidence that Omicron will be less severe than delta but that it will spread rapidly, leading to some nervous moments. Short term restrictions are likely across the world as governments buy time for their booster rollout. Looking forward though, investors are more sanguine.

Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.

Alex Kitteringham


Team No Comments

What President Biden could do to dampen oil prices (but probably won’t)

Please find below, an article regarding the global energy market and the options for the Biden administration. Received from AJ Bell, yesterday morning – 05/11/2021.

It is a case of so far, so bad for US President Joe Biden’s plan to force the oil price lower by releasing 50 million barrels of oil from America’s Strategic Petroleum Reserve (SPR). Fifty million barrels a day may sound a lot. But in global terms it is half a day’s demand and America’s entire SPR would meet worldwide oil demand for barely a week.

The Biden plan’s failure to make a dent in oil prices seems less surprising in this context. By contrast, the OPEC+ cartel can move oil markets, as its 2020 production cut and then gradual subsequent increases in supply can testify. OPEC and Russia are still producing less than they were before the pandemic, even as the global economy and energy demand recover, and the latest OPEC+ meeting (2 December) will be the next test of the cartel’s influence.

“Fifty million barrels of oil may sound a lot but in global terms it is half a day’s demand and America’s entire Strategic Petroleum Reserve would meet worldwide oil demand for barely a week.”

COP26 made quite clear the political and public will to move away from hydrocarbon as our prime source of fuel. You can therefore hardly blame Saudi Arabia, Russia and other leading producers for looking to monetise their oil assets while they can still do so.

“Demand for energy could therefore outstrip supply, with the result that hydrocarbon prices could remain firm, or even keep rising – at least unless COVID-19 rears its head again and depresses economic activity and oil demand in the process.”

In addition, alternative, renewable sources are not yet ready to take up all of the slack from oil and gas. Demand for energy could therefore outstrip supply, with the result that hydrocarbon prices could remain firm, or even keep rising – at least unless COVID-19 rears its head again and depresses economic activity and oil demand in the process.

That leaves advisers and clients with a quandary about what to do with oil stocks – and whether they should put profit over principle should oil and gas prices stay stronger for longer – and what to think about the global economy. High energy prices are a tax on consumers and a source of margin pressure for many corporations. If oil and gas rocket, there remains the chance that the indebted global economy could wobble under the strain, virus or no virus, just as it did when oil reached $147 a barrel in 2007.

Deep water

“The combined capital investment budgets of the seven Western oil majors – BP, Chevron, ConocoPhilips, ENI, ExxonMobil, Shell and TotalEnergies – looks set to drop to its lowest mark since 2005, as a percentage of sales.”

Unlikely as it may seem, oil and gas companies are listening to the political and public call for a shift to a greener, less carbon-intensive world. The combined capital investment budgets of the seven Western oil majors – BP, Chevron, ConocoPhilips, ENI, ExxonMobil, Shell and TotalEnergies – looks set to drop to its lowest mark since 2005, as a percentage of sales. In many cases, those budgets include renewable projects, too, so spending on oil production and exploration is by implication lower still.

Global oil majors continue to shy away from new investment in oil and gas fields

Source: Company accounts for BP, Chevron, ConocoPhillips, ENI, ExxonMobil, Shell and TotalEnergies, Marketscreener, consensus analysts’ forecasts

This can also be seen in the global rig count data provided by Baker Hughes (BHI:NYSE). On the previous occasions when oil traded above $80 a barrel, over 3,000 rigs were active. The current figure is barely half that.

Global oil rig activity is subdued relative to prior periods of $80-plus oil

Source: Baker Hughes, Refinitiv data

In the absence of a COVID-inspired setback, that again points to a possible supply/demand squeeze, especially as banks, insurers and many pension funds and managers continue to publicly declare their unwillingness to finance new oil and gas exploration projects.

Action points

“This is not to say President Biden has no options at all, as he seeks to manage the energy transition in the world’s largest economy and keep hard-pressed consumers on board as he and the Democratic Party prepare for the mid-term elections in 2022.”

This is not to say President Biden has no options at all, as he seeks to manage the energy transition in the world’s largest economy and keep hard-pressed consumers on board as he and the Democratic Party prepare for the mid-term elections in 2022.

  • The President could encourage oil and gas exploration with tax breaks or at least grant permission to pipelines that his administration has previously blocked, such as the $8 billion Keystone XL project. This does not seem likely, given his and his party’s commitment to the Paris Agreement and COP26.
  • President Biden could look to thaw relations with Venezuela and Iran, both of whom are currently locked out of global markets by US sanctions. Granted, it is hard to get a handle on potential Venezuelan output given the chaos that prevails there, but Caracas has produced two to three million barrels a day in the past. It is thought that Iran could double output fairly quickly from two to four million barrels a day if given the chance. Hey presto – an extra four to five million barrels a day in total. But geopolitics may rule out this option, as those sanctions are in place for a reason and the President will not want to look dovish on foreign policy ahead of those mid-term polls either.

If the President wants to curry favour, as he may well, who is to say he does not offer consumers some sort of subsidy or hand-out, so they can meet their fuel and heating bills? In a world where money printing and negative interest rates are accepted as normal, and austerity is political poison, anything is possible. But it might not be wise to expect oil consumption, or prices, to fall if such a vote-buying scheme is cooked up.

Please continue to check back for a range of blog content from us and from some of the world’s leading fund management houses.

Alex Kitteringham

6th December 2021.

Team No Comments

The Dirty Business of Greenwashing

Please see the below article received from AJ Bell late on Friday afternoon:

The 2021 United Nations Climate Change Conference, known as the COP26 summit, was held in Glasgow earlier this month and brought together heads of state, government leaders and important industry figures from nearly 200 nations. The main objectives of the conference were to restrict the level of global warming to 1.5 degrees Celsius above pre-industrial levels, and to achieve net-zero emissions by 2050.

The global finance industry has always been seen as an important factor in the drive to achieve climate change targets, and indeed the COP26 meeting included a dedicated ‘finance day’ where key players from governments, central banks and business discussed how the industry could rise to meet the ambitious challenges of the conference

Investment strategies where values are taken into account, often known as Environmental, Social and Governance (ESG) investing, have been available for many years, but they are now very well established as a strong market trend, with consumers around the world placing ever-larger amounts into ESG products. A recent FCA survey indicated that 80% of respondents wanted their investment portfolios to “do some good” as well as providing them with a financial return, and 71% wanted to invest in a way that “is protecting the environment”.

For their part, the UK authorities such as HM Treasury, the Bank of England and the Financial Conduct Authority (FCA) have been working on a number of initiatives. On the COP26 finance day, the FCA published its strategy on ESG, indicating its desired outcomes and the actions needed to achieve them.

The strategy codifies a number of items that the regulator has previously announced, with themes of transparency, trust, tools, transition, and team. The overarching objective is to support the financial sector to drive positive change, particularly in the transition to net zero emissions.

One potentially important piece of work is the discussion paper published by the FCA on 3 November – Sustainability Disclosure Requirements and Investment Labels. The European Union’s Sustainable Finance Disclosure Regulation (SFDR) contains a variety of provisions, including an obligation for financial advisers to take into account the ESG/sustainability preferences of clients as part of the advice process. SFDR was not implemented into UK law prior to Brexit, but the FCA has now launched its own Sustainability Disclosure Requirements which will cover much of the same ground as SFDR would have done.

Although the discussion paper is centred around the investment management industry, financial advisers are also referenced as a critical part of the value chain. The FCA’s proposals for advisers are not fully fleshed out in its paper, but a clear steer is given, so advisers should pay keen attention to the regulator’s moves in this area:

“…we recognise the important role that financial advisers play in providing consumers with sufficient information to assess which products meet their needs. We are also exploring how best to introduce specific sustainability-related requirements for these firms and individuals. Building on existing rules, a key aim will be to confirm that they should take sustainability matters into account in their investment advice and understand investors’ preferences on sustainability to ensure their advice is suitable. We will develop proposals on this in due course, working with Government…”

One core problem associated with the area of ESG investing is that of labelling. The FCA has a concern that there is the potential for ‘greenwashing’, where sustainability claims made by investment management firms do not stand up to scrutiny. There is a litany of different labels which can be confusing for investors and advisers looking for suitable products. These products can be variously labelled as ethical, ESG, SRI, responsible, green, impact and so on. With labels being an important driver of consumer choice, the FCA is looking to enhance trust in this area and develop a set of objective classifications for products. Its proposal is to classify them into five high-level categories, as follows:

  • Not promoted as sustainable’ – Here, sustainability risks have not been integrated into the investment philosophy of the product and there are no specific sustainability objectives.
  • Responsible’ – The impact of sustainability factors on risk and return has been considered. There should be a level of ESG integration into the product’s management, with evidence of ESG capabilities and resources from the manager, and demonstrable investment stewardship.
  • Sustainable – Transitioning’ – Products with sustainability characteristics, themes or objectives which do not yet have a substantial proportion of underlying assets that meet the sustainability criteria set out in the UK Taxonomy, but the expectation is that this proportion will rise over time.
  • Sustainable – Aligned’ – Products with sustainability characteristics, themes or objectives which have a substantial proportion of underlying assets that meet the sustainability criteria set out in the UK Taxonomy.
  • Sustainable Impact’ – Products with explicit objectives to deliver net positive social and/or environmental impact as well as a financial return.

Alongside these labels, the FCA has indicated its intention for firms to provide the most pertinent sustainability-related information via consumer-facing disclosure, in order for investors to be armed with all the information required for them to make a considered choice with their capital.

The FCA’s proposals are at a very early stage, but the direction of travel is fairly clear. ESG investment is growing at a rapid pace, driven by strong consumer demand and a significant push from regulators and governments around the world. In many ways, the industry remains somewhat fragmented and its labelling can be confusing for customers. With increasing choice from asset managers, and more advisers incorporating ESG products into their advice process to meet their clients’ preferences, the regulator’s moves to build trust make the industry clearer and more harmonised will be welcomed in many quarters.

Our Comment

When we first started to write about ESG around 18 months ago, we commented that we expected the regulator to react to the growing ESG trends in the investment world.

As you can see here, we were not wrong, it seems like this is the start of their push towards giving us guidelines around ESG investing.

It’s not a bad thing though. Greenwashing is a major issue in the industry. The more investors read and hear about ESG investments, the more they discuss it with their advisers and the more likely they are to want to invest in this way.

This unfortunately means that some non ESG approved investments won’t want to lose out on the investors money and will greenwash their way into getting people to invest with them.

The proposed new disclosure requirements will help to prevent this in the industry by making the labelling of investments more clear and transparent.

Keep checking back for more ESG related content and our usual market commentary from some of the world’s leading fund management houses.

Andrew Lloyd DipPFS